Ontario Economic Update May 2017: Leading the Canadian economy

Ontario Economic Update May 2017: Leading the Canadian economy

The Institute's May 2017 Economic Update for Ontario covers several broad categories: economic growth, labour market indicators, the housing market, consumer and business indicators, inflation, and international trade. The Institute provides a brief analysis of significant findings, followed by summary tables with the most recent economic data for Ontario and other regions. 

Takeaways

  • Ontario’s real GDP grew 2.7 percent in 2016, considerably higher than the growth seen in the Canadian economy at large
  • The finance and real estate sector have been the greatest contributors to economic growth over the past few years
  • Household consumption will be critical to economic expansion in 2017
  • Ontario’s unemployment rate has declined to its lowest rate since January 2001
  • Labour market conditions are still being held back by declining real wages
  • Ontario is predicted to have the fastest growing economy of all provinces in 2017
  • Declining real wages, looming interest rate hikes, and high household indebtedness present significant challenges to long-term economic progress

Economic growth in 2016

Ontario’s Gross Domestic Product (GDP) estimates for Q4 2016 are: the economy grew slower than the Canadian economy at large in Q4 but total growth in 2016 still exceeded the national growth rate. Ontario’s economy grew modestly at 0.5 percent in the fourth quarter of 2016. Despite another drop in investment in non-residential assets, the economy expanded on the back of healthy gains in consumption and residential investment (Exhibit 1).[1] In a way, this has been an overarching theme in 2016. Consistent growth throughout the year in consumption and residential investment helped Ontario achieve 2.7 percent growth in real GDP in 2016 (Exhibit 2). Up from 2.5 percent growth in 2015, further economic growth was somewhat restricted by declining investment in non-residential assets. 

Exhibit 1

Exhibit 2

Finance and real estate are the backbone of growth in Ontario

When broken down by industry sectors, finance and insurance, real estate and rental leasing, and wholesale trade combine to make up 46 percent of total GDP growth in 2016 (Exhibit 3). Finance and real estate, in particular, have been the greatest contributors to GDP growth over the past 2 years. The sizable growth once attributed to the manufacturing sector remains elusive. Despite rebounding in 2014, the manufacturing sector’s relative contribution to growth has been weak in recent years.

Exhibit 3

Consumption will be crucial to economic expansion in 2017

Multiple indicators suggest that Ontario experienced robust GDP growth in the beginning of 2017. Retail sales grew almost one percent in March and Q1 growth in 2017 was more than two percent. Data in new motor vehicles sales illustrates similar trends as sales in March grew by double digits. Ultimately, Ontario’s rise in new motor vehicles sales in Q1 2017 accounted for roughly 67 percent of the total increase in sales across Canada. Both variables paint a favourable picture for consumption-led growth in Ontario in the first quarter of 2017. As the largest GDP component of the economy, consumption is expected to drive growth in Ontario’s economy in the near future.

Investments in residential and non-residential assets set for a role reversal

The consecutive run of growth for residential investment seen since Q1 2015 will inevitably come to an end. The Ontario government’s measures to tackle the hot housing market, increasing pressures on affordability and forthcoming rises in interest rates will eventually slow down or reduce residential investment. Still, the timing of this slowdown remains uncertain. Investment in residential structures should still help boost GDP in 2017 supported by almost 20 percent growth in housing starts in the latest quarter. However, early signs indicate a trend reversal later in the year: residential building permits faced considerable decline throughout the first three months of 2017 and housing starts dropped by almost 20 percent in April. Both housing variables are leading indicators of residential investment, so a continued slowdown could depress investment over the remainder of 2017.  

Investment in non-residential assets, on the other hand, is set to make a comeback in 2017 and will reinforce Ontario’s economy after dragging it down in 2016. Changes in capital expenditures on non-residential tangible assets based on the Annual Capital and Repair Expenditures Survey (CAPEX) results are highly correlated with investment growth in non-residential assets seen in Ontario’s economic accounts (Exhibit 4).[2] Non-residential investment is anticipated to bounce back this year as expenditure intentions in 2017 grew by almost 4 percent. The bulk of the intended increase in expenditures is accounted for by higher expenditure in the public administration sector (44 percent of the total change).

Exhibit 4

Lacklustre wage growth still impeding labour market conditions

Ontario’s unemployment rate hit 5.8 percent in April, the lowest rate since January 2001. However, this was mostly influenced by a drop in the number of individuals actively looking for work while employment remained relatively the same from March.

The decline in the labour force was especially concentrated in youth between the ages of 15 and 24. The jobless rate in Ontario stayed well below the national rate of 6.5 percent but British Columbia and Manitoba continue to champion the lowest rates amongst all provinces at 5.5 percent and 5.4 percent, respectively. Since December 2016, Ontario’s economy has added 20,600 net jobs, driven by 56,000 more full-time jobs and a decline in part-time jobs.

Still, the wage dynamics in the economy paint a bleak story about the health of the labour market. Real wages fell by 1.6 percent in Ontario, declining in most aggregate occupations except occupations in art, culture, recreation and sport as well as sales and services occupations (Exhibit 5). Growth in hourly wages in Canada was slow throughout the beginning of the 2017, failing to keep up with inflation. Year-over-year wage growth rate for Canada in April was the worst seen since 1997. Negative real wage growth in Ontario and Alberta were culpable and only somewhat offset by modest increases in Québec. Lack of wage gains was again cited in the Bank of Canada’s decision to keep its overnight lending rate at 0.5 percent.

The Ontario government recently proposed sweeping changes to its employment and labour laws, including increasing the minimum wage to $15 by January 1st, 2019. The jury is still out on what effects they would have on the labour market. The Institute intends to follow these changes closely.

Exhibit 5

Powerful tailwinds will thrust the economy in 2017

Strong consumption, elevated residential investment, and increasing levels of investment in non-residential assets (especially infrastructure spending by the government) are expected to strengthen Ontario’s economy in 2017. Although residential investment may slow down as the government’s housing measures kick in, Ontario will likely be a propelling force for growth in Canada.

Critical risks may dampen economic progress in the long run

Ontario is predicted to be the fastest growing economy of all provinces in 2017.[3] Unfortunately, the forecast beyond 2017 is less rosy. Declining real wages, looming interest rate hikes, and high household indebtedness present significant challenges to economic progress for Ontario.

Written by Saad Usmani

Summary tables

 

[1] For the purpose of this analysis investment in non-residential assets is defined as the sum of business investment in non-residential structures, machinery and equipment, and intellectual property products, investment by nonprofit institutions, and government capital expenditure. Investment in residential assets is defined as business investment in residential structures.

[2] The Annual Capital and Repair Expenditures Survey collects information about capital expenditures by the public and private sector. Estimates for 2017 are based on expenditure intentions.

[3] Provincial Outlook. RBC. March 2017.

Category: Economic Update, Economic Progress, Economy, Employment, Households, Housing